Making Cents Blog

Find Out How Refinancing Can Work for You

Interest Rates at an All-Time Low

After buying a home, settling in, making improvements, possibly raising a family, you might want to consider the benefits of refinancing. The benefit that usually comes to mind first is the significant savings resulting from lower interest rates and lower monthly payments. This is truer now than ever before.

At the beginning of 2012, the average interest rate was 5.098 percent (according to the Bureau of Economic Analysis). And today it’s not unusual to find rates in the 3.0 percent range. This is an all-time low that makes refinancing your mortgage a desirable and sensible option. On a $200,000 mortgage, for example, the savings will amount to $50,000 over the course of 30 years by reducing the interest rate by just one percentage point.

Finding the Right Loan with the Right Lender

By taking the time to work with a qualified and concerned lender, you’ll find a loan that will suit your personal needs, both in the short term and long term.

For instance, refinancing will give you the option of switching from an adjustable-rate mortgage (or ARM) to a fixed rate mortgage. With an ARM, interest rates go up or down as rates in the mortgage industry change, but if you’re planning on staying in your home long-term, you may want to refinance into a fixed rate program that holds rates steady for three, five, or seven years.

If, on the other hand, you don’t plan on long-term ownership, it might be a good idea to look into ARMs that offer terms such as lower initial interest rates, lower rate increases, and lower payment caps that prevent the interest rate from becoming too high. (For example, Alliance Credit Union offers a 5-5 ARM that only adjusts once every 5 years instead of every year).

What Your Equity Can Do for You

Refinancing also allows you to take cash out from your equity. (Equity is the difference between the value of your house and what you owe on it.) If you refinance for more than you owe, you can use the surplus cash to make improvements to increase your home’s worth, pay for education for your children or yourself, pay off credit card debt and consolidate finances. (It’s also worth noting that a home equity line of credit with an APR of less than 1.99 percent is available from Alliance until 2014.)

A Few Things that Deserve Extra Consideration

Of course, if you decide to borrow on your equity, you decrease the amount you come away with when you decide to sell your home. Anything that is not a solid investment—like a trip to Hawaii, new motorcycle, or holiday abroad—should probably be reconsidered if you’re planning on selling within a couple of years and expecting full remuneration for your home.

There are some other situations where the advice of a lending representative will prove helpful. For instance, if you’ve owned your home for several years and paid on the first mortgage for that length of time, you’ve paid a steadily increasing amount on the principal while increasing your equity. With a second mortgage, most of your payment will go toward the interest of the loan and you have to start the process of getting into a position to pay down the principal all over again.

If your first mortgage has a prepayment penalty, make sure the penalties don’t outweigh the benefits of refinancing. And make sure that mortgage fees and points are offset by the savings you expect from lower monthly payments.

Remember the Privileges of Membership

To find out how refinancing can best work to your advantage, visit your credit union (or call 800.232.8669 x. 5450) to speak to an Alliance Credit Union representative who will consult with you personally and give you their personal attention regarding your mortgage options.

Your credit union is a trusted lender who has their members’ best interests in mind. Remember the privileges of membership. As Alliance says, “If you have an account, you’re also an owner.”

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